Yahoo Finance Zacks Industry Outlook Highlights General Motors, PACCAR and Harley-Davidson
For Immediate Release
Chicago, IL – March 17, 2023 – Today, Zacks Equity Research discusses General Motors GM, PACCAR PCAR and Harley-Davidson HOG.
Industry: Autos - Domestic
Link: https://www.zacks.com/commentary/2066549/3-domestic-auto-stocks-well-poised-to-fend-off-industry-woes
The prospects of the Zacks Domestic Auto industry look somewhat shaky at the moment amid rising recessionary fears, which may cool off demand for vehicles. A brewing banking crisis is adding fuel to the already weak economy mired by stubborn inflation and Fed's hawkish stance. Many economists project that the United States could slip into recession sooner than expected.
With consumers rather downbeat about economic outlook, they are less likely to spend heavily on high-ticket items, which may hurt vehicle sales. Additionally, high commodity and labor costs are adversely impacting the margins of the industry participants. While robust deliveries of electric vehicles (EV) are acting as a booster, the overall prospects of the industry don't appear bright, at least for the near term.
Nonetheless, we recommend keeping a close eye on three auto giants namely General Motors, PACCAR and Harley-Davidson, which are better positioned to brave the multiple industry challenges.
Industry Overview
The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and provides employment to a large number of people — is at the forefront of innovation, courtesy of its nature and the transformation that it is going through.
The widespread usage of technology and rapid digitization are resulting in the fundamental restructuring of the automotive market. Several companies in the industry have engine and transmission plants and conduct research and development and testing of electric and autonomous vehicles.
What's Shaping the Industry?
Intensified Economic Uncertainty: At a time when the U.S. economy is already mired in uncertainty amid Fed's aggressive rate hikes, the sudden collapse of the Silicon Valley Bank has just added to the gloom. The banking crisis has prompted Goldman Sachs to ratchet down U.S. GDP forecasts. Yesterday, Goldman Sachs lowered its U.S. growth forecast by 0.3 percentage points to 1.2% for 2023. The investment banking giant also raised the probability of a U.S. recession from 25% to 35%.
The highly cyclical Domestic Auto industry is likely to feel the heat of a fragile economy. Demand for vehicles is expected to cool off as consumers are gradually becoming apprehensive about buying high-ticket items when recessionary fears are growing. While auto sales in 2022 fell to a decade low, primarily owing to supply chain issues, this year, the industry is likely to suffer from macroeconomic challenges. The supply crunch is most likely to morph into a demand slowdown in 2023.
High Commodity & Operational Costs: Prices of raw materials like steel, aluminum and others are soaring and adversely impacting the gross margins. Commodity inflation, although gradually abating, is far from over. Most automakers have already warned that high raw materials and labor costs will remain a major headwind for quite some time. Manufacturing inefficiencies and logistic challenges are expected to keep playing spoilsports. Additionally, massive R&D expenses for the development of high-tech cars would also likely strain near-term cash flows.
Soaring EV Popularity: Amid all the gloom and doom, buyers' inclination toward green cars is a silver lining. Climate change concerns, technological advancement and stringent fuel-emission standards are increasing green vehicles' adoption by both automakers as well as customers. Legacy automakers are going the extra mile to gain a strong foothold in this red-hot e-mobility space. Demand for electric cars is off the charts. While sales of passenger vehicles declined last year, EV sales in the country shot up 65%. In fact, sales of EVs topped 5% of U.S. new vehicle sales for the first time in 2022. The EV momentum is likely to offer some respite.
Zacks Industry Rank Indicates Glum Prospects
The Zacks Automotive – Domestic industry is a 20-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #166, which places it in the bottom 33% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group's earnings growth potential.The industry's earnings estimates for 2023 have declined 20.5% over the past three months.
Despite the industry's tepid near-term prospects, we will present you three industry participants worth considering for your portfolio. Before that, let's take a look at the industry's stock market performance and current valuation.
Industry Lags S&P 500 & Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The industry has lost 40.8% compared with the S&P 500 and sector's decline of 11.5% and 34%, respectively, over the said time frame.
Industry's Current Valuation
Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 11.27X compared with the S&P 500's 11.87X and the sector's 12.21X. Over the past five years, the industry has traded as high as 53.78X, as low as 8.44X and at a median of 15.05X.
3 Stocks Worth Holding Onto
General Motors: This legacy U.S. automaker's hot-selling brands in America, like Chevrolet Silverado, Equinox and GMC Sierra, are driving its top line. General Motors' massive EV push is commendable. The automaker plans to roll out 30 fresh EV models by 2025-end. This year, it will have nine EV models in the North America market. Solid demand for GMC Hummer EV, Chevrolet Bolt EV and EUV, Cadillac crossover EV, Equinox EV, Silverado EV, Sierra EV, Blazer EV and BrightDrop Zevo 600 are expected to buoy top-line growth.
General Motors has enough cash on the balance sheet to weather short-term headwinds and navigate economic cycles. The firm had total automotive liquidity of $39.5 billion as of Dec 31, 2022, including $24.4 billion of cash/cash equivalents.
The Zacks Consensus Estimate for GM's 2023 sales implies year-over-year growth of 3.2%. The consensus mark for 2023 earnings has moved north by 10 cents over the past 30 days. The consensus mark for 2024 earnings has risen by 13 cents over the past 30 days. General Motors currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
PACCAR: PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The new DAF lineup, comprising XF, XG and XD models, augurs well. New launches have improved the company's product mix. PACCAR's accelerated efforts toward electrification and connected vehicle services are praiseworthy.Continued growth in the aftermarket parts—which is a high margin and a less cyclic business— thanks to the rampant adoption of its proprietary MX engine bodes well.
High truck utilization and increased average fleet age are positively impacting PACCAR Parts results. The company's strong balance sheet is complemented by A+/A1 credit ratings assigned by Standard & Poor's and Moody's, respectively.
The Zacks Consensus Estimate for PCAR's 2023 sales and earnings implies year-over-year growth of 13% and 6.3%, respectively. The consensus mark for 2023 earnings has moved north by 13 cents over the past 30 days. The consensus mark for 2024 earnings has increased by a cent over the past 30 days. PACCAR currently carries a Zacks Rank #3 and has a VGM Score of A.
Harley-Davidson: This iconic motorcycle maker in the United States is reaping the benefits of its Hardwire strategic plan.The Hardwire strategy aims at long-term profitability and growth through refreshed product offerings. In sync with its long-term growth objectives to streamline its product portfolio, Harley-Davidson will be focusing on motorcycle models and technologies that better align with market trends.
As an integral part of its Hardwire strategy, Harley-Davidson launched an online platform for its used motorcycles, namely HD-1, last year. The H-D1 marketplace platform is also set to fuel the company's prospects. The LiveWire unit—dedicated to e-bikes— will particularly help the company gain a solid foothold in a sportier market environment with its innovative and differentiated offerings.
The Zacks Consensus Estimate for HOG's 2023 and 2024 sales implies year-over-year growth of 4% and 7%, respectively. The consensus mark for 2023 earnings has moved north by 4 cents over the past seven days. The consensus mark for 2024 earnings has risen by 5 cents over the past seven days. Harley-Davidson currently carries a Zacks Rank #3 and has a VGM Score of A.
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